Session 8
Levels of Stragety, Competitive
Advantage and Strategic Direction
Slides from Johnson, Whittington, Scholes, Exploring Strategy


Launch Assignment 2
• Use relevant strategic management tools and techniques
to evaluate the current strategy of the organisation based
on what you know of their strengths, weaknesses,
opportunities and threats, derived from your analysis in
assignment 1. Analyse why this strategy might be suitable,
acceptable and feasible. Evaluate how the strategic
direction relate to growth, innovation or international
expansion. Briefly identify and justify another potential
strategic direction for the organisation. Given the nature of
this analysis there must be a contemporary and inventive
flavour to much of the relevant data.


Business strategy


Strategic business units (SBUs)

A strategic business unit (SBU) supplies
goods or services for a distinct domain of activity.
• A small business has just one SBU.
• A large diversified corporation is made up of
multiple businesses (SBUs).
• SBUs can be called ‘divisions’ or ‘profit centres’
• SBUs can be identified by:
– Market based criteria (similar customers,
channels and competitors).
– Capability based criteria (similar strategic

revenues and profits. • To allow large corporations to vary their business strategies according to the different needs of external markets. • To encourage accountability – each SBU can be held responsible for its own costs. .WOLVERHAMPTON BUSINESS SCHOOL The purpose of SBUs • To decentralise initiative to smaller units within the corporation so SBUs can pursue their own distinct strategy.

• Competitive strategy is concerned with how a strategic business unit achieves competitive advantage in its domain of activity. • Competitive advantage is about how an SBU creates value for its users both greater than the costs of supplying them and superior to that of rival SBUs. .WOLVERHAMPTON BUSINESS SCHOOL Generic strategies • Porter introduced the term ‘Generic Strategy’ to mean basic types of competitive strategy that hold across many kinds of business situations.

WOLVERHAMPTON BUSINESS SCHOOL Three generic strategies Source: Adapted with the permission of The Free Press. Porter. Porter. All rights reserved . a Division of Simon & Schuster. from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. 1998 by Michael E.. Inc. Copyright © 1985.

• Experience.WOLVERHAMPTON BUSINESS SCHOOL Cost-leadership Cost-leadership strategy involves becoming the lowest-cost organisation in a domain of activity. . Four key cost drivers that can help deliver cost leadership: • Lower input costs. • Economies of scale. • Product process and design.

WOLVERHAMPTON BUSINESS SCHOOL Economies of scale and the experience curve .

WOLVERHAMPTON BUSINESS SCHOOL Costs. prices and profits for generic strategies .

WOLVERHAMPTON BUSINESS SCHOOL Differentiation strategies Differentiation involves uniqueness along some dimension that is sufficiently valued by customers to allow a price premium. Two key issues: • The strategic customer on whose needs the differentiation is based. . • Key competitors – who are the rivals and who may become a rival.

Generic Strategy WOLVERHAMPTON BUSINESS SCHOOL  Differentiation Drivers  Service quality and levels  Product features  Delivery time  Image .

Chen and H. Gursoy. ‘The US airlines relative positioning’. 57–67: p. in D.WOLVERHAMPTON BUSINESS SCHOOL Differentiation in the US airline industry Source: Simplified from Figure 1. 5. 62 . Kim (2005). 26. Tourism Management. M.

Two types of focus strategy: • cost-focus strategy (e.g. Ecover). Ryanair). • differentiation focus strategy (e. .WOLVERHAMPTON BUSINESS SCHOOL Focus strategies (1) A focus strategy targets a narrow segment of domain of an activity and tailors its products or services to the needs of that specific segment to the exclusion of others.g.

WOLVERHAMPTON BUSINESS SCHOOL Focus strategies (2) Successful focus strategies depend on at least one of three key factors: • Distinct segment needs. • Distinct segment value chains. . • Viable segment economics.

e. if being unique costs nothing). Even Porter acknowledges that the strategies can be combined (e. .WOLVERHAMPTON BUSINESS SCHOOL ‘Stuck in the middle’? Porter’s argues: • It is best to choose which generic strategy to adopt and then stick rigorously to it. doing no strategy well. • The argument for pure generic strategies is controversial.g. • Failure to do this leads to a danger of being ‘stuck in the middle’ i.

• Competitive failures – if rivals are similarly ‘stuck in the middle’ or if there is no significant competition then ‘middle’ strategies may be OK.WOLVERHAMPTON BUSINESS SCHOOL Combining generic strategies • A company can create separate strategic business units each pursuing different generic strategies and with different cost structures. • Technological or managerial innovations where both cost efficiency and quality are improved. .

1995 WOLVERHAMPTON BUSINESS SCHOOL . Prentice Hall. The Essence of Competitive Strategy. Faulkner and C. Bowman.Strategy clock Source: Adapted from D.

WOLVERHAMPTON BUSINESS SCHOOL Strategy clock .differentiation • Strategies in this zone seeks to provide products that offer benefits that differ from those offered by competitors.  differentiation with price premium (1 o’clock) – used to increase profit margins.  focused differentiation (2 o’clock) – used for customers that demand top quality and will pay a big premium. . • A range of alternative strategies from:  differentiation without price premium (12 o’clock) – used to increase market share.

WOLVERHAMPTON BUSINESS SCHOOL Strategy clock – low price Low price combined with:  low perceived product benefits focusing on price sensitive market segments – a ‘no frills’ strategy typified by low cost airlines like Ryanair.  lower price than competitors while offering similar product benefits – aimed at increasing market share typified by Asda /Walmart in grocery retailing. .

.  to build volume sales and gain from mass production. • Hybrid strategies can be used:  to enter markets and build position quickly.WOLVERHAMPTON BUSINESS SCHOOL Strategy clock .hybrid • Seeks to simultaneously achieve differentiation and low price relative to competitors.  as an aggressive attempt to win market share.

. • In competitive markets such strategies will be doomed to failure.WOLVERHAMPTON BUSINESS SCHOOL Strategy clock – non-competitive • Increased prices without increasing service/product benefits. • Only feasible where there is strategic ‘lock-in’ or a near monopoly position.

g. Cheap razors that only work with one type of blade. • Lock-in can be achieved in two main ways:  Controlling complementary products or services.  Creating a proprietary industry standard. Microsoft with its Windows operating system. E. . E.g.WOLVERHAMPTON BUSINESS SCHOOL Strategic lock-in • Strategic lock-in is where users become dependent on a supplier and are unable to use another supplier without substantial switching costs.

WOLVERHAMPTON BUSINESS SCHOOL Establishing strategic lock-in Size or market dominance First-mover dominance Self-reinforcing commitment Insistence on preservation of position .

WOLVERHAMPTON BUSINESS SCHOOL 6BE003 STRATEGIC MANAGEMENT Strategic Direction Slides from Johnson. Whittington. Scholes. Exploring Strategy .

Johnson and K. Scholes Exploring Corporate Strategy 4th edition How? Alternative methods Internal development Acquisition Market development Diversification: related unrelated Joint development alliances .Developing Strategy WOLVERHAMPTON BUSINESS SCHOOL Developing Strategies On What basis? Basis of Choice In Which direction? Alternative Directions Corporate purpose and aspirations Protect and build SBU generic competitive strategies Product development Market penetration Adapted from: G.

Scholes Exploring Corporate Strategy 4th edition Products Protect/Build • withdrawal • consolidation • market penetration Market Development • new segments • new territories • new users New Product Development • on existing competences • with new competences Diversifaction • on existing competences • with new competences Development . Johnson and K.In which Strategic Direction? WOLVERHAMPTON BUSINESS SCHOOL Competence Existing Existing Markets New Adapted from: G.

Ansoff Explained WOLVERHAMPTON BUSINESS SCHOOL Market penetration is a strategy of increasing sales in current market with current products Market development is a strategy of increasing sales of current products in new markets Product development is a strategy of increasing sales by improving present products or developing new products for current markets Diversified growth occurs when new products are developed to be sold in new markets .

? Whitbread Consolidation .? BA Intermediate Growth .? Sainsbury’s Market Penetration .? Sony Unrelated Diversification .? Tesco Mergers & Acquisitions – ? Lloyds/HBOS (ABN) Joint Developments and Strategic Alliances .Daimler .? De-merger .? Imperial Diversification .? Hanson Internal Development .Strategic Options WOLVERHAMPTON BUSINESS SCHOOL Withdrawal .? Northern Rock Market Development .

com/travel/home/public/en_gb Their choice of strategic growth should then make sense in light of this. British Airways strap line “The World’s favourite airline” Reveals 2 fundamental aspirations: •Global Operations •Basis of Differentiation •http://www. .britishairways.WOLVERHAMPTON BUSINESS SCHOOL Developing strategies that satisfy the organisation’s mission objectives and stakeholders is at the core of strategic management.

WOLVERHAMPTON BUSINESS SCHOOL Consolidation & retrenchment • Consolidation refers to a strategy by which an organisation focuses defensively on their current markets with current products. • Retrenchment refers to a strategy of withdrawal from marginal activities in order to concentrate on the most valuable segments and products within their existing business. .

• Organisation wants to concentrate resources into other activities. • Through cost reduction and asset reduction • Market is in long term decline .Withdrawal and Consolidation WOLVERHAMPTON BUSINESS SCHOOL • These strategies are particularly relevant where: • Organisation lacks resources or competences to compete.

This strategy: strategic capabilities. builds on established scope is unchanged.  economies of scale. and provides greater and experience curve benefits. leads to greater market share and with buyers and suppliers. means the organisation’s  increased power.WOLVERHAMPTON BUSINESS SCHOOL Market penetration Market penetration refers to a strategy of increasing share of current markets with the current product range. .

• Extend to develop the number of distribution outlets in a geographic area • Penetrate/undermine competitor’s position. • Extend or modify product to fill gaps. difficult where static. styles. options. New sizes. • Good where overall market is growing.Market Penetration WOLVERHAMPTON BUSINESS SCHOOL • Aim to maximise market share. . protect and build competitive position.

• This strategy offers two main advantages: • Low risk .g. • 2. Susceptible to industry growth rate and changes e. limitations are: • 1. WOLVERHAMPTON BUSINESS SCHOOL • Encourage non users to use product and light users to use more frequently. risk of recession.operating within known area • Allows specialisation and competitive advantage • However. Long term growth slow.. .

Constraints of market penetration Retaliation from competitors WOLVERHAMPTON BUSINESS SCHOOL Legal constraints Economic Constraints (recession or funding crisis) .

 can be an expensive and high risk  may require new strategic capabilities  typically involves project management risks. •This strategy :  involves varying degrees of related diversification (in terms of products).Product development WOLVERHAMPTON BUSINESS SCHOOL Product development refers to a strategy by which an organisation delivers modified or new products to existing markets. .

bbc. customer active paradigm • http://web. Especially where life cycles are short! • However. research and development is expensive and risky.stm?bw=bb&mp=wm&asb=1&new s=1# .edu/evhippel/www/ Wikieconomics http://news.mit. • Open source.Product development WOLVERHAMPTON BUSINESS SCHOOL • At some stage all organisations must invest in substantial product modifications and or develop new products.uk/player/nol/newsid_6980000/newsid_6980900/6980955.co.

WOLVERHAMPTON BUSINESS SCHOOL Market development (1) Market development refers to a strategy by which an organisation offers existing products to new markets .

g.  can take the form of attracting new users (e.  may also entail some product development (e.  can take the form of new geographies (e. . new styling or packaging).WOLVERHAMPTON BUSINESS SCHOOL Market development (2) This strategy involves varying degrees of related diversification (in terms of markets) it. extending the use of aluminium to the automobile industry).  must meet the critical success factors of the new market if it is to succeed.  may require new strategic capabilities especially in marketing. extending the market covered to new areas – international markets being the most important).g.g.

Market development WOLVERHAMPTON BUSINESS SCHOOL • There are three approaches to exploring opportunities of extending current production into new markets. • Extension into new market segments (some product modification) • Develop new uses for existing products • Geographical expansion nationally or internationally (product and marketing modification) .

obtain synergy and spread risks. • Diversification involves increasing the range of products or markets served by an organisation. • Related diversification involves diversifying into products or services with relationships to the existing business.WOLVERHAMPTON BUSINESS SCHOOL Diversification • The key objective of diversification is to strengthen the value chain. • Conglomerate (unrelated) diversification involves diversifying into products or services with no relationships to the existing businesses. .

• Exploiting superior internal processes. • Increasing market power. • Stretching corporate management competences. .WOLVERHAMPTON BUSINESS SCHOOL Drivers for diversification • Exploiting economies of scope – efficiency gains through applying the organisation’s existing resources or competences to new markets or services.